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Another day, another U.S. cannabis deal pulled amid a capital markets drought.

On Tuesday, Cresco Labs Inc. said it is cancelling a US$120-million bid for VidaCann, a large Florida producer and dispensary chain owner.

“Florida is a great state. It's just it's a matter of prioritization, right timing, capital markets,” said Cresco CEO Charlie Batchell on an earnings call on Tuesday. “Right now I think it's most prudent for us to focus on these states where we have these existing opportunities and to really truly maximize them.”

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Cresco is far from alone in rethinking expansion plans. Medmen Enterprises Inc. was the bellwether when it cancelled a $682-million takeover of PharmaCann, LLC in October. Several weeks later, Curaleaf Holdings, Inc. renegotiated its acquisition of Cura Partners, Inc., which owns the Select brand in Oregon, reducing the up-front amount payable by 40 per cent.

This week alone, Nevada greenhouse operator Flower One Holdings Inc. paused negotiations to acquire a property in California, SOL Global Investments Corp. cancelled a US$150-million acquisition of MCP Wellness, a Michigan-focused company, and Vireo Health International, Inc. said it is putting a hold on dispensary build-outs in Massachusetts and Nevada and slowing down expenditures in New Mexico and Puerto Rico.

“Given the ongoing challenges that our industry is facing, we feel it's prudent to continue our lean skilled approach to our markets, and we will continue implementing some proactive austerity measures,” said Vireo CEO Kyle Kingsley on an earnings call on Tuesday.

“Until further notice, we do not intend any substantial CapEx outlay through the first half of 2020 beyond ongoing expansion in Pennsylvania, New York, and Minnesota,” he added.

The fact that large MSO deals are getting held up by antitrust competition reviews has made the situation even more difficult. While these deals have languished, the market has changed dramatically.

When the VidaCann deal was negotiated in January of 2019, for instance, Cresco opted for a large cash component to make the offer more attractive.

“The VidaCann structure made it just a very difficult transaction for us to close,” Mr. Batchell said on the earnings call. “The structure of that was developed in January, really, of this year, when capital markets were different, before Illinois passing adult-use law. It was really a different scenario.”

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The decision by Cresco to cancel the deal – along with a sale-leaseback transaction that netted the company US$38-million – was generally well received by analysts.

“The large cash outlay required for VidaCann at around US$120-million had clouded our visibility on CL’s near-term liquidity,” wrote GMP Securities analyst Robert Fagan in a note on Wednesday.

“We estimate CL’s balance sheet should now have available liquidity of around US$85-million. Compared to a possible around US$60-million to US$70-million funding gap previously, we believe this strongly boosts CL’s operating flexibility.”

While Cresco’s cancellation of the Florida deal puts it in a better position to expand into Illinois, where recreational sales are slated to open up in the new year, other MSOs appear to be making decisions from a more defensive standpoint.

The problem is many MSOs simply expanded too quickly in a fragmented regulatory environment, said Ken Villazor, CEO of Flower One in an interview. Flower One, by contrast, decided to focus only on Nevada to begin with; its expansion into California, now on pause, will be reassessed in the new year.

“To say you're in 12 state markets, you're in effectively 12 different countries and you've got individual or separate management teams in each state market, and you have a real mix of asset that aren't necessarily congruent or accretive. And once you've gone down that road, it's really hard to undo that,” Mr. Villazor said.

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“We’re seeing a lot of MSOs are having to retreat, whether it’s based on acquisitions or whether it’s based on their existing asset portfolio, and it’s just hard to do,” he said.

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